Impact of Federal Tax Provisions on Resyndication of Federally Assisted Rental Housing

Pursuant to a congressional request, GAO reviewed the impact of federal tax provisions on the resyndication of federally assisted, low-income rental housing property having a mortgage held or insured by the Department of Housing and Urban Development (HUD).

GAO noted that as the insurer or holder of multifamily mortgages, HUD approves the resyndication of federally assisted properties to new groups of investors to protect its interest in the property. As a precondition of its approval, HUD generally requires the new investors to make some new capital investments to restore the property's physical or financial viability. GAO found that: (1) the Economic Recovery Tax Act of 1981 increased the financial benefits available to investors by providing more advantageous depreciation incentives; (2) the incentives encouraged an increase in private investment in resyndication; and (3) the primary tax incentives that have been available to investors were related to depreciation of the property and the use of accounting methods which allowed investors to claim tax deductions for expenses concerning financing arrangements. GAO also found that: (1) investors benefited from the below-market interest rate financing because the higher purchase price resulted in an increased depreciable basis and higher depreciation deductions; (2) although the sellers of the property received less interest income because of the below-market interest rate, the taxable gain would be taxed at a preferential capital gains tax rate; and (3) greater financial returns were available to new investors when seller-financed, below-market interest rate borrowing arrangements were used.